So far, we have stressed that integrating nominal variables and inflation targeting into the analysis is merely helpful for understanding boom-bust episodes. In fact, if one is not to wander too far from current standard models, it is essential. To clarify this point, it is useful to think of the standard real business cycle model that emerges when we strip away all monetary factors from our model. If we take a completely standard version of such a model, a signal shock is completely incapable of generating a boom-bust that resembles anything like what we see. Households in effect react to the signal by going on vacation: consumption.
